Suppose you decide to buy a new car and, after considering whether to buy or lease it, you’ve decided to buy. Now comes your next big decision: should you pay cash for a car or finance it?
Once again, there’s no one “right” answer. It truly depends on a few factors, like:
- The kind of car that fits your needs
- The cost of that car
- The cash you have in savings
- The other things you’d need that cash for besides a car
- The interest rate you’d qualify for on a loan
While I’m not a fan of taking on debt, I chose to finance the last car I bought because it made sense for my situation to hold on to more of my cash.
The Pros of Buying a Car in Cash
If you have the savings available, you could opt to pay for the car in full. There are a few advantages to this:
- You’ll own it outright. The car will be 100% yours, no matter what happens in your life. So if you lose your job, for example, you won’t also lose your car because you can’t make payments — because you’ll have no payments to make.
- You might be able to negotiate a better price. By buying it outright the dealer gets more money up front (a win for them), so they might be more generous in what they can offer you and you could save a few thousand dollars just by being able to pay in full.
- You won’t pay any interest to own a depreciating asset. Generally, you’ll probably end up paying less for the car over the years you drive it because you’ll save thousands on interest payments. If your ultimate goal is getting a car for a lower total cost, buying it outright could be the answer. You can run a few payment scenarios through an online calculator like this one.
The Cons of Buying a Car in Cash
On the flip side, even if you have the cash available it might not be in your best interest to pay outright. This is because:
- You need to be sitting on a lot of cash in order to afford cutting a giant check. If you’re unable to make such a large one-time payment (and still have savings left over for emergencies and other upcoming expenses), spreading your car payments out could make monthly budgeting simpler for you.
- You might be limited in the kind of car you can afford to buy outright today. While there are many amazing deals out there, especially on used cars, you might be signing up for a car that’s in need of more expensive maintenance right after you purchase it. Or you might settle for a car that doesn’t suit your needs just because it’s in your budget and currently available.
- Your credit score may qualify you for 0% financing. If you can buy a car and get a really low interest rate (under 3%) on the loan, then you’ll be able to redirect that cash towards other financial goals, like paying off higher interest rate debt or investing for retirement.
Should I Take Out a Car Loan?
Taking on debt, while scary, is not always bad. And one thing that debt allows you to do is afford a nicer, newer, or more suitable car than you would have been able to afford in one payment. Just don’t take on an unsustainable monthly loan payment to get a luxury car! In reality, cars are depreciating assets so I tend to stay away from luxury vehicles.
You might need to hold onto more of your cash in order to fund other goals (like when I first started my business and a small monthly car payment left more of my cash available to invest into Gen Y Planning). Financing a car allows you to do just that — pay off your car slowly while still having money available. This is a solid tactic if you qualify for a really low-interest loan (less than 3%).
And, of course, there are some downsides. For one thing, you won’t 100% own the car until you make the last payment. Debt of any kind can be stressful for some people, so you might just feel better if you buy it outright and don’t owe money to anyone.
If you already have a car loan, but the interest rate isn’t low, you could benefit from refinancing. I would check with your bank or credit union and see if you could refinance to a lower interest rate and maybe cut the length of the loan as well.
So What Should You Do?
Before you make your final choice, shop around. See what different dealers offer, and see what auto loan terms you can get from banks or credit unions. You don’t have to settle for the dealer’s loan terms!
Once you’re armed with information, negotiate! If you have a strong sense of your budget and the kinds of cars you’re interested in, it never hurts to ask for what you want. It also never hurts to walk away if a salesperson isn’t open to negotiation.
Ultimately, it comes down to knowing what you want, what you can afford, and how you can use your money more strategically to reach your goals.